Why Germany must swallow this Keynesian free lunch
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Version 0 of 1. In the movie All the President’s Men, the advice of Deep Throat, the reporters’ source, was “follow the money” – a great idea for tracking corruption, but hopeless as a guide to global macroeconomics. In the Greek crisis everyone is focusing on the money, but it is trade that matters. Until Greece can generate an export surplus it cannot pay its debts, and it cannot run an export surplus until others run deficits. But this is precisely what German policy is preventing the Greeks (and all the other deficit countries) from achieving. The OECD estimates that the German current account surplus in 2015 will be more than 7% of GDP. Every international macroeconomist knows that this surplus can only be corrected by a mixture of expenditure expansion, via fiscal policy, and expenditure switching, via a change in the real exchange rate. Germany will countenance neither. It will not inflate to reduce competitiveness; and even with an internal budget surplus of some 8% of GDP it will not loosen fiscal policy. What has been far too little under discussion is “why not?”. Related: Eurozone ministers approve Greek bailout extension - live updates The answer lies largely in German history and in the narrative that has come to dominate its policymaking. The German hyperinflation of 1919 to 1923 was so destructive, especially of the savings of the middle class, that it remains, even now, etched into the German psyche. No matter that the present situation is dominated by unemployment and by the beginnings of price deflation: the fear of inflation remains. In the 1930s, Germany had high unemployment, but Germans’ memories of that, and especially of how they exited from it – via a classic Keynesian fiscal expansion – is largely forgotten, as the fiscal injection was Hitler’s rearmament. John Maynard Keynes’s General Theory was published in 1936, and his ideas swept the board in the US and the UK; but with the Nazis in control, the ideas made little impact in Germany. Postwar was no better. Keynes’s preface to the German edition of the General Theory referred to fiscal policy as particularly easy for deployment by “totalitarian” states – not exactly music to German ears, after Hitler. One result is that economics in German universities has paid little attention to “macro”, and Keynesian economics is even less visible. The Bretton Woods conference of 1944, dominated by the US and the UK (with Keynes as the latter’s main representative), set the framework for the postwar economic world. Germany was not at the table. In the late 1940s Germany received Marshall aid and other forms of support. These aid tranches were crucial to Germany’s immediate postwar recovery. They were generous, they led to fiscal injections, but they were done to Germany rather than chosen by Germany. From 1950 onwards the success of the German economy reduced still further any interest in Keynesian fiscal policy. With exports as the energiser, there was no need for Keynesian stimulations. Occasionally the economy had to be slowed down and for this monetary policy was both sufficient and effective. There was one near-exception. In the slowdown after the oil shock of 1973, German chancellor Helmut Schmidt was sympathetic to the idea, floated by the Organisation for Economic Co-operation and Development, that Germany and France could be the “locomotives” of a recovery. However, the policy was neither well-planned nor implemented with conviction, and not viewed as a great success. In the minds of the policymakers, these events merely served to reinforce their view that fiscal policy was, at at best, irrelevant. Merkel remarked: 'It doesn’t sound so good in German'. Why not? Because the German word for 'debt' also means 'guilt' West Germany’s massive expenditure to support and restructure East Germany following reunification was never acknowledged as fiscal policy. In reality, that is precisely what it was, but, to the Germans this was “infrastructure” and “supply-side” and “reform”, never “Keynesian”. The final nail in the coffin lies in the German language. In conversation about Greek debt relief with Antonis Samaras, Greece’s then prime minister, Angela Merkel remarked: “It doesn’t sound so good in German”. Why not? Because schuld, the German word for “debt”, also means “guilt”! Until Germans revisit their history and realise how special their own circumstances have been, they will never understand why fiscal expansion by them (plus a one-off rise in wages) is now required; and why without this the Greeks can never repay their debts. Of course, in reality there are far more countries than just Germany and Greece, but to appeal to this complexity is to throw dust in our eyes so that we do not see the inconsistencies of the German position. Germany’s huge internal budget surplus implies budget deficits elsewhere, which they then castigate others for incurring. Equally, export-led growth cannot be a solution for all. Germany’s adherence to its own export-led surplus makes it more difficult for everyone else. Can Germany make the adjustment? The policies required would increase German real wages, not an idea that most politicians would normally find hard to sell. And there need be no “guilt” about the debt, since with high unemployment everyone can gain. This is the one occasion on which even economists can agree that there is such a thing as a free lunch. Unless Germany does adjust, the tragedy will not be limited to Greece. The future of the eurozone is at stake. |